How to counter the effect of inflation on your savings

Increases in inflation are continually eroding the value of people’s saving and reducing their standard of living. With the increase in inflation rate, all prices will go up where as saving will not be multiplied in that ratio.

Because of inflation average Indian consumers have to spend extra amount out of their earning towards fuel, food and utilities due to which consumption in many categories has to decline. This will also reduce the income tax payments to government of India.

To counter inflation one can look for funds that pay higher dividends Instead of earning interest in bank account. These funds often invest in large companies that are making consistent profits and paying dividends to shareholders.

Interest from your bank account will not be enough to counter the inflation rate. One of the demerits of investing in to these securities linked investment option is that these funds or shares are very risky and not safe to invest. Funds are less volatile than shares but still one can lose money in investing in to these funds.

Effect of inflation on your savings – how to protect your savingsOne should not invest his entire money into these funds because of the risk factor it carrying. You should invest certain amount in safe interest bearing fixed deposits of a bank.

With inflation rising and wages remain low; the standard of living in India is also likely to take a hit. Equities are good hedge against rising prices of commodities and other products. This is because share prices will also go up as it’s valued based on the companies asset and cash flow which will rise in line with prices.

The best way to beat inflation is to invest in a diversified portfolio generating income more than the interest rate. One should consider a combination of investing in shares, fixed interest, equities and property.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.